Truth Squaders Speaketh

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FILED JANUARY 24, 2013

Dear Client:

These are often the most popular issues of BBD -- the ones you write. In a recent reader survey, BBD asked the question: "What are the issues that nobody seems to be aware of or talking about?" Boy, did we get a big response. Lots of concern about SKUs, craft brewers not supporting their brands, big brewers reaching into wholesalers' pockets, big retailers have too much power, wine and spirits taking share, and much more. I took the best and grouped them loosely according to subject below. Here are the issues you are thinking about, starting with criticism of wholesaleres (don't worry, everybody gets some heat from readers in this issue, and these are only about a third of the total comments):

'Poor' wholesalers are not under attack...they continue to get larger and more dominant despite not performing for many breweries...no realistic chance to exit a wholesaler as State laws needlessly protect them. Not about eliminating the 3rd tier but more about holding them accountable and competition.

The general impression I get when I visit with wholesalers is they seem to have lost enthusiasm for getting people to enjoy beer. It all seems to be about sales and pricing, the fun element is missing.

Wholesalers in 'brand grabbing mode'.

That with consolidation within the distributors the distributors are raising their prices and margins. Standard gross margins on imports and crafts five years ago was 26%-28%, today it is 30% to 32%. And the same distributors do not today provide quantity discount tiers (where legal) unless the supplier is financially subsidizing it.

How wholesalers are selling Craft right now could lead to challenges down the line. Right now people get into craft, hire or promote a person to run craft and in some cases have special salespeople to sell the beer. Here is where challenges lie. If you have a strong owner and senior management that is committed to craft, they make sure the general market sales team is selling at least the bi crafts. The special "craft team" ends up taking the path of least resistance and sells the odd ball one off's and actually promotes the tap of the week idea that retailers are doing. Also in the off premise when the retailer wants to fill shelves by style instead of brands, the craft teams are not trained well enough to show why this is a bad idea. Lastly, whether they believe it or not, those specialized craft teams are sometimes viewed as the JV team that are looking for their chance to get in the Varsity team, the general market team, because the opportunity for more money and advancement lies greater over there.

Elimination of wholesaler competition through consolidation which in turns weakens the whole beer business. Spirits and Wine Distributors are a lot 'hungrier' for business and brands. B eer Distributors seem to have a sense of fat, lazy, complacent and entitlement.

Craft brands growing with a "discounting" pricing model.

Subsidies in tax breaks given to new craft breweries and their lack of investment in media to grow their brands.

Retail space used to be earned through marketing a brand plan to create brand awareness which created trial consumption. Today, the craft brew model is very simple: create a product and expand distribution. What is not being talked about, is how quickly many of these brands are dying in the existing market and the only way they are surviving is through expanding distribution outside of their local area.

Craft Brewers (some although not all) pushing their mojo to an over the top level.

The amount of square feet required to support SKU growth.

Craft brewers don't have the people to support their growth and take a lot of short cuts with quality.

What happens to the industry once the craft bubble bursts?

Exit strategies for craft breweries. Can a craft brewery be sold and still retain its soul?

How do distributors handle all the new SKU's with out adding more people?

The market conditions that have allowed the growth of craft, including a strong pricing umbrella, low barriers to entry, free-riding off the fixed costs of distributors that are covered by big brewer brands.

Back of the building for Craft Brewers. Too many are concentrating on putting in tanks without thought of how best to fulfill logistical needs of servicing markets.

The emergence of the Nano-Brewer producing sub par Craft Beer and self distributing it into the on-premise channel thus tainting the reputation of the Craft Beer Category and taking away business from established Craft Brewers and Distributors.

Craft brewers working to take out all state laws

Payola. When a brand goes into a new market, they expect the wholesaler to pay for it, and pay big.

The fact that craft brewers are doing more to disrupt, change or erode the three-tier system than anyone else in the industry.

Growth of new craft brewers far outpacing M&A activity or equity infusions, indicates value is few and far between (so far).

The damage that the craft versus crafty debate could be causing.

Big Brewers having success at taking distributor margins and the distributors are not fighting back as a group because they are fighting each other for the next craft beer offering.

Suppliers pushing the limits to the breaking point and shifting financial burden to Wholesalers--some talk but not enough.

Eroding margins the past two years as 'white space' packages are becoming more prevalent. Packages like 18/16 oz cans at a lower margin that take sales from higher margin 30 pks and loose cases.

The reality of our brewer's plan to eliminate the middle tier. All of these programs they are forcing us to do and the costs they are shifting are part of the plan. Distributors have to see through all of this and start pushing back and realize that we are independent business people and act like it.

Large brewer push-down to the wholesale level of not only costs but marketing responsibilities of new brands.

Is our message (marketing) resonating with younger consumers (21 - 30), or are they even 'listening'; are too many of our major brands, including domestic premiums, disregarding and therefore alienating older (40+) consumers with the marketing programs that are being utilized today? If both situations are true, are we then losing volume as a result at both ends?

How bad A-B logistics sucks. They send beer when you don't forecast anything. Inventories are 25+ days. Goose Island arrived with 35 days on draught. I know that they are aware of it but they totally ignore it. I don't think that we need product supply coordinators anymore. The beer leaves the brewery and they take the money out of my account. So, they don't care whether I really sell it or not because they got their money.

ABI has sucked the "Soul" and "Life" out of the beer and brewing industry and made everything a game of numbers on a spreadsheet. Thank you to the American Craft Brewers who are filling the void and coming in from behind the vacuum of suction that is ABI. Somewhat related to the above, most everyone I speak to is inundated with tracking and measuring and business planning. My managers are in the trade 75% less today than they were 4 years ago. Every supplier wants some web based business planning tool filled out. Every supplier wants to track and measure every chain ad and out of stock. Technology was suppossed to make our lives easier but it has only made things more complex.

Category Captains is a very unfair and probably illegal business practice that benefits ABI and MC. No other supplier can call this out because to the potential backlash from retailers (who benefit from this practice).

Why the DOJ should be investigating the conflict created when ABI wants to influence the route to market for "other brands". When you reduce competition you hurt the consumer....period.

New LDA's consumers NOT choosing a macro beer on their 21st birthday

As the major Suppliers continue to grow, they become more focused on Wall Street and less on Main Street. The game becomes all about meeting EPS goals. To meet these goals in a flat industry, they target cost synergies. After they have exhausted synergies at the Supplier level, they begin to find 'opportunities' at the Wholesale level. This is the phase we are in at the present time. Next is Retail. Then Beer becomes a Commodity. As the Piranha gets larger, he needs to eat more goldfish.

The expansion of chain retail into liquor markets and their influence on the 3 Tier System. For instance, Costco just opened in a strong liquor market like DC and we all know their stance on the 3 tier system. Couple that with loose ABC laws.

Costco kicking out M/C and A-B out of CA locations.

Where's Costco lurking?

Walmart, other retailers and brewers believing that distributors should service retail accounts on a daily basis.

Retail pushing more micro crafts and hurting overall dollar sales and the behest of a few craft centric customers.

If production = control of pricing (see AB-Modelo discussion) then how about same concept applied to Miller controlling Pabst pricing?

From consumer standpoint, how long before the hipsters notice their 'genuine' PBR is just another contract brewed mass produced beer?

Smaller craft companies breaking the law to gain business or overall distribution for their brands.

Not ALL of these little craft guys are going to make it. When do we start to see the attrition?

Local craft brewers are forming alliances and setting up contracts with retailers which require them to ONLY carry local craft brews for some type of reimbursement on product.

I believe it's discussed but it seems that we spend more time bickering amongst each other than trying to get a handle as a group on some of the bigger issues.

ABI has sucked the "Soul" and "Life" out of the beer and brewing industry and made everything a game of numbers on a spreadsheet. Thank you to the American Craft Brewers who are filling the void and coming in from behind the vacuum of suction that is ABI. Somewhat related to the above, most everyone I speak to is inundated with tracking and measuring and business planning. My managers are in the trade 75% less today than they were 4 years ago. Every supplier wants some web based business planning tool filled out. Every supplier wants to track and measure every chain ad and out of stock. Technology was suppossed to make our lives easier but it has only made things more complex.

The big increase in the cost to distributors of co-op marketing. Crown plans on increasing cents/ case contributions for the next 3 years, new brands or brands that switch distributors are asking for much higher cents/ case contributions. Marketing contributions are hard to track and are used in many cases to offset the cost of electronic scan programs with chains vs. traditional media, special events, or sponsorships. The good news is that the suppliers are becoming more dependent on those increasing co-op dollars.

How poor the marketing is for the domestic premium lights (all three.)

No unity within the industry to promote the category together. Too much squabbling.

The issue of the amount of brand support that the wholesalers are asked to kick-in. The amount of media, local brand support, etc. continues to increase. New product support asks are incredible, $2.00 - $3.00 per case in year one with 'smaller' amounts in years two and three.excise tax increase threat

Deteriorating quality of ABI packaging. Consumers notice!

I wouldn't say nobody is aware, but I think the 'Beer Cliff' that looms in the future is all the capacity coming on with craft brewers. If the big guys continue to lose share they will eventually push the price button to make sure their supply chain stays efficient. If anyone remembers 2005 cash flow levels for distributors were a disaster.

Brewers infringement on wholesaler autonomy. They have great ideas but want to totally control the process down to the smallest detail. Ok for short term but dangerous long term.

The aggressive price increases AB / MC have taken on in the past several years, led by AB. It does not appear sustainable to me.

Tension between the state-based regulatory system and the sales and marketing strategies of large global suppliers.

The influx of new line extensions on imports.

Lack of direction from the big brewers

Aging truckers will be pensioning off soon and there is not a lot of people in the pipeline to replace them.

Less profit due to fractionalization, or beer becoming like wine.

Breweries and wholesalers pushing alcohol beverages over traditional beer, we are pushing consumers away from beer and into flavored drinks (including flavored beer) which deteriorates the beer category and opens up consumers to others choices of cheap infused alcohol drinks.

The rift growing between large and small to mid-size distributors.

Morale in the industry - I interact with several competitors (wholesalers, sales people, etc) who feel the fun of being in the industry is now being trumped by over-competitive strife.

As long as we measure beer volume rather than dollars or volume of ethanol, we may be tracking the wrong primary measure.

Share erosion from spirits, wines, and other beverages; stagnation of beer volume trends.

Big brewers seem to be disregarding their talent in favor of new blood chasing new consumers but how is this effecting crafts, chain business and wholesaler relationships. Is the youth movement hurting or helping?

New media (social media, etc.) is changing the way we communicate with our consumers. How is it changing our sales model? And what will be the long-term effects and prognosis for beer when we put so much of our brands essence/power in the hands of the consumer?

What are distributors doing to earn their equity and current margins that are averaging close to 30%.... they want more margin and are making more than ever before but are investing less behind their Brands they service locally.... yet they are cashing out with equities when they sell at 4-5x GP!

Lack of understanding by suppliers of distributor's business and vice versa. I realize this is not a new problem but I am amazed that, as an industry, we have not taken steps to rectify this issue. Distributors more and more are profit focused and suppliers, particularly close to the street, are volume focused. This causes 95% of the disagreement in my market and prevents us from having productive business driving dialogue.

Small Craft Brewers not being able to compete andcontinued tensions between tiers and the need for further franchise reform.

It's been mentioned some but I think is worth more discussion; franchise reform. Boston Beer and Harpoon are trying to push franchise reform in their home state that would include breweries that make up less than 20% of the distributors business and no barrel cap. If passed this would set precedent for these breweries to use in other markets across the country to pass similar reform laws.

Big national wholesalers leaning on suppliers to put their brands in all their distributorships.

ABI will continue to influence and discourage ABI wholesalers from taking on new brands and will only keep "other brands" when they acquire a Wholesalership. If the DOJ is concerned about new brands route to market and limiting future competition in the beer business they will have no choice but to request ABI to divest from owning or controlling the 2nd tier.

Retailer frustration with big brewers lack of objectivity. There is a storm coming and those who act in a self-serving fashion are going to bomb.

How to grow industry volume, acting together (superseding brewery- and cross-tier-issues) to counter wine & hard liquor and other threats.

Distributor rep selling skills and product knowledge need major improvement. Also, on-premise retail sales knowledge has a long way to go. More focus on rate-of-sale, growing brands, shaping beer culture.

Keg discounts and rotating draft walls will get us nowhere.

Legalization of marijuana will re-frame the competitive environment.

Whew. That was exhausting. More tomorrow, so stay tuned.

C-STORES REACH RECORD LEVEL

The U.S. convenience store count increased to a record 149,220 stores as of December 31, 2012, a 0.7% increase (1,094 stores) from the year prior, according to the 2013 NACS/Nielsen Convenience Industry Store Count, says CSN.

Convenience stores account for 34.8% of all retail outlets in the United States, according to Nielsen, which is significantly higher than the U.S. total of other retail channels including drug stores (40,727 stores), supermarkets (33,192 stores) and dollar stores (24,075 stores).

The convenience retailing industry continues to be dominated by single-store operators, which now account for 62.9% of all convenience stores (93,819 stores total), an increase of 0.7% over last year. There also continues to be bifurcation within the industry. The only other company size that experienced growth was stores owned by companies with 500-plus stores. That total is now 21,738 stores, an 8.9% increase over last year.

BEER BRIEFS:

WE REGRET TO REPORT THAT Diane M. Hankins Fall, founder and first President of Warsteiner Importing Agency for the USA, died Saturday, January 19, 2013. The majority of Diane's career was the in the beer industry. After rising through the ranks as a commodities buyer for Coors Brewing Company, Diane was wooed away to become the founder and president of Warsteiner Importers Agency, USA. Under her leadership, Warsteiner became one of the top imported beers in the United States. Diane developed Warsteiner's slogan, "Warsteiner... life's too short to drink cheap beer."

Until tomorrow, Harry

"Courage is resistance to fear, mastery of fear - not absence of fear."-Mark Twain

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